Tax Representation Letter from Target for Tax-Free Section 368(a)(2)(E) Reorganization

Summary

This template is a Tax Representation Letter from Target for Tax-Free Section 368(a)(2)(E) Reorganization that a target company should provide to tax counsel in order for tax counsel to issue a tax opinion that a reverse subsidiary merger (aka reverse triangular merger) qualifies as a tax-free reorganization. If, however, neither acquiror's nor target's tax counsel is providing a tax opinion, the representations contained in this template may still be helpful to include in the representations provided by target in the merger agreement. This template includes practical guidance and drafting notes. A reverse subsidiary merger (also known as a reverse triangular merger) is one in which the target merges with and into merger subsidiary, with the target company surviving the merger. In order to qualify as a tax-free reorganization under Section 368(a)(2)(E), several requirements must be met, including: (a) The reorganized company must continue a substantial portion of the target's historic business; (b) The continuity of proprietary interest requirement must be satisfied; (c) The companies must formally adopt a "plan of reorganization"; (d) The parties must have a valid business purpose for engaging in the merger; (e) The merged company must hold "substantially all" of the properties held by target prior to the merger (the IRS has set a guideline under Rev. Proc. 77-37, 1977-2 C.B. 568, which provides that this requirements will be satisfied if target transfers at least 90% of its net assets and 70% of its gross assets in the merger; (f) The parent acquiror must acquire at least 80% of target's stock in exchange for parent voting stock; (g) The parent acquiror must be in control of merger sub following the merger; and (h) The target's shareholders cannot receive any stock in merger sub. For a discussion of different types of tax-free reorganizations under Section 368(a), see Tax-Free Acquisitions. The template provides a starting point for drafting representations applicable to a tax-free Section 368(a)(2)(E) reorganization and should be tailored for the specific facts and circumstances. This template does not address representations that may be applicable to special kinds of corporations, such as real estate investment trusts. This template also does not address acquisitions that occur with non-U.S. corporations. Capitalized terms in this template are generally included in the standard tax-free reorganization merger agreement; however, you should cross-reference the acquisition agreement to ensure that the applicable definitions are the same. If both target and parent acquiror's tax counsel are providing tax opinions, the representation letter should be addressed to both target and acquiror's tax counsel, as each must rely on the representations provided therein. See also Tax Representation Letter from Acquiror and Merger Sub for Tax-Free Section 368(a)(2)(E) Reorganization.